Profs File Amici Curiae Seeking En Banc Rehearing of Second Circuit Pharma Reverse Payment Antitrust Decision

Professor Mark Lemley

On May 20, 2010, 86 law, economics, public policy and business professors filed an amici curiae brief with the United States Court of Appeals for the Second Circuit seeking the en banc review of the panel decision in In re Ciprofloxacin Hydrochloride Antitrust Litigation, which issued on April 29, 2010. In the per curium panel decision the judges affirmed the district court finding the the ruling in In re Tamoxifen Citrate Antitrust Litigation clearly dispositive, but due to the “exceptional importance of the antitrust implications of reverse exclusionary payment settlements of patent infringement suits,” the panel invited the plaintiffs-appellants to petition the entire Second Circuit for rehearing en banc.

Mark A. Lemley, William H. Neukom Professor, Stanford Law School and partner in the San Francisco law firm Durie Tangri LLP, is representing the 86 professors pursuing this matter pro bono as a concerned law professor and not on behalf of any client. When asked for comment he offered that he thinks “the Cipro case may well be the turning point in legal treatment of reverse settlements.”

The professor brief is short, sweet and to the point.  On behalf of the professors Lemley writes:

I. The Tamoxifen Rule is Bad Policy

The precedent that compelled the outcome in this case contains fundamental errors of economic reasoning that, if widely implemented, would shield many anti-competitive agreements from the reach of antitrust law, causing great harm to competition, U.S. consumers, and (by unjustifiably raising the costs of needed medicines) public health. Under the panel decision in In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 212 (2d Cir. 2006), an agreement between a patent holder and an alleged infringer to settle their patent litigation cannot violate the antitrust laws so long as the patent litigation was not a sham or otherwise baseless and the settlement agreement does not impose restrictions on the alleged infringer that extend beyond the scope of the patent. Such settlements are immune from antitrust scrutiny even if, as here, the patent holder makes a substantial payment to the alleged infringer in exchange for the latter’s promise not to sell the patented product independently during the patent’s lifetime, and even if the patent in question is “fatally weak.” Id. at 211. In so holding, Tamoxifen adopted a rule of near per se legality for a practice akin to a naked market division scheme, a horizontal agreement that seems anticompetitive on its face.

Tamoxifen, moreover, is based on the mistaken premise that (absent fraudulent procurement) a patent grants full immunity from antitrust scrutiny for any and all anticompetitive conduct within the exclusionary power of the patent. The patent grant itself provides only a presumption of validity. The Tamoxifen rule has effectively converted that rebuttable (and oft-rebutted) presumption into an irrebuttable one. By claiming to focus on the “exclusionary zone” of the patent, but ignoring the question of whether the patent was valid in the first place, Tamoxifen falls back on the assumption that the patent holder, by virtue of the patent grant, has an absolute right to enter into a settlement that excludes competitors from the market. But that assumption is false. A patent does not confer a certain legal right. In re Etter, 756 F.2d 852, 856 (Fed. Cir. 1985). Rather, it reflects an initial judgment by the Patent and Trademark Office that the invention is patentable. That judgment is made after only a cursory scrutiny. When a patent is asserted in litigation, accused infringers are entitled to demonstrate that the patent should not have issued. As the Court put it in Lear, Inc. v. Adkins, 395 U.S. 653 (1969):

A patent, in the last analysis, simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity. Consequently, it does not seem to us to be unfair to require a patentee to defend the Patent Office’s judgment . . .

Id. at 670. Virtually every accused infringer asserts invalidity, and nearly half of all patents litigated to judgment are ultimately found invalid. John R. Allison & Mark A. Lemley, “Empirical Evidence on the Validity of Litigated Patents,” 28 Am. Intell. Prop. L. Ass’n. Q.J. 185 (1998). The number is even higher in pharmaceutical cases – an FTC study of all pharmaceutical patent litigation between 1992 and 2000 found that the patent owner lost in 73% of the cases.

Further, the fact that the patent owner must pay the accused infringer a large sum of money to stay out of the market and not to challenge the patent is strong evidence that the parties to the litigation – those with the most knowledge of the facts – see the patent as likely to be held invalid or not infringed. Indeed, the payment in this case was so large – $398.1 million – that it dwarfed the profits the generic manufacturer would expect to receive from successful entry. Put another way, even if it was absolutely certain that the patent was invalid, the patent owner could have paid Barr $398.1 million not to invalidate the patent, and Barr would have been better off taking the money and allowing the patent to remain in force than invalidating the patent. The presence of such a payment may or may not be conclusive evidence that the patent was invalid, but it is certainly evidence that could have led a jury to find that at the time they entered into the settlement, the parties believed the patent was likely invalid.

Tamoxifen recognized that its rule shields troubling settlements from the antitrust laws, but concluded that the policy favoring settlement is so strong that it must extend even to “fatally weak” patents, “even though such settlements will inevitably protect patent monopolies that are, perhaps, undeserved.” Tamoxifen Citrate, 466 F.3d at 211.

We agree that there is a general policy in favor of settlement. We strongly disagree, however, with Tamoxifen’s view that patent settlements must always be encouraged. That view confuses a general policy in favor of settlements that are in the public interest with an endorsement of a particular kind of settlement. The general preference for settlement over litigation must be tempered when settlements have important adverse effects on third parties. Patent litigation serves the crucial role of testing weak patents and protecting the public from monopolies based on invalid patents.

Nor is immunizing exclusion payments necessary to encourage the many settlements that are in the public interest. Both generally and in the pharmaceutical context, patent owners and generic firms can and do settle patent cases without exclusion payments, by agreeing to let the generic company enter in exchange for a license fee, by agreeing to delay entry without a payment, or in other ways that do not involve paying the generic company to forego competition. Indeed, the Federal Trade Commission, to which pharmaceutical patent settlements must now be reported, found 14 agreements settling patent litigation during 2003 and 2004, with none involving an exclusion payment. See The fact that pharmaceutical companies can and do settle litigation without exclusion payments shows that there is no need to allow anticompetitive settlements in order to get the social benefits that most settlements provide.

II. The Tamoxifen Rule Is Unprecedented and Conflicts With the Approaches of the Sixth Circuit, the Eleventh Circuit, and the Federal Trade Commission

The Tamoxifen rule is far outside the mainstream of judicial and academic analysis of exclusionary settlements. The Sixth Circuit considers such agreements per se illegal, see In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003), the Federal Trade Commission and the Antitrust Division of the United States Department of Justice both consider them presumptively anticompetitive, see In re Schering Plough Corp., No. 9297 (F.T.C. Dec. 18, 2003), rev’d, 402 F.3d 1056 (11th Cir. 2005), while the Eleventh Circuit applies its own modified version of the rule of reason that inquires into the underlying validity of the patent before characterizing the conduct, see Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003). Only the Federal Circuit has adopted the Tamoxifen approach, and it did so in a case on appeal from a district court in the Second Circuit in which Second Circuit law applied. In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008).

Similarly, although academic commentators are divided on the treatment to be accorded such settlements, they uniformly agree they should not be considered per se legal. Some, including some of the undersigned, have written that settlements involving a large payment from the patent holder to the challenger should be presumptively anti-competitive.  Others have argued for applying the rule of reason or for per se illegality. Other courts and commentators note that the antitrust analysis is more complex for settlements that generate offsetting benefits to consumers, e.g., those involving negotiated entry dates or patent licenses.

The undersigned amici differ in their views on precisely what standard should be applied to judge the legality of exclusionary settlements. We need not resolve those differences in this case because we all agree that exclusionary settlements of patent lawsuits can sometimes violate the antitrust laws. The But none take the position adopted by the Tamoxifen – that the court need not consider the validity of the patent in the antitrust analysis of whether that patent could have excluded a generic competitor from the market, but can instead conclusively presume that validity.

Tamoxifen court took the unprecedented step of concluding that as a matter of law exclusionary settlements can never be illegal unless the underlying lawsuit was a sham. As a result, unless the opinion is reversed case law in the Second Circuit – and perhaps in the country as a whole – will never develop to distinguish pro- and anti-competitive settlements.


We urge the Court to grant review en banc in order to reconsider its decision in Tamoxifen.

Mark A. Lemley
Counsel of Record
William H. Neukom Professor
Stanford Law School
559 Nathan Abbott Way
Stanford, CA 94305
(650) 723-4605


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Join the Discussion

15 comments so far.

  • [Avatar for IANAE]
    June 23, 2010 09:26 am

    “HOWEVER, that does not necessarily give the courts carte blanche to change the provisions of the law, just because they don’t like it.”

    What provisions of the anti-trust law would they be changing?

  • [Avatar for Gena777]
    June 22, 2010 09:23 pm

    I have to agree with GQ on this one. Congress apparently drafted bad legislation, and everyone (except the paid-off generics) seems to be unhappy with it. HOWEVER, that does not necessarily give the courts carte blanche to change the provisions of the law, just because they don’t like it. If they do so, they’re legislating from the bench. I’m all for promoting the public interest, but legal consistency counts for quite a lot. This seems to be a subject that should be decided by Congress, not the courts.

  • [Avatar for Gene Quinn]
    Gene Quinn
    June 15, 2010 07:50 pm


    In fact, I think there are a number of companies that race to be the first challenger so they can sell their right to the brand name and effectively forestall any other challenges. An argument could be made that this is patent trolling of a different type.

    Hhhhhmmmm… maybe I have figured out what to write about tomorrow!


  • [Avatar for Blind Dogma]
    Blind Dogma
    June 15, 2010 03:59 pm

    Thanks – that’s a different wrinkle than the one I was looking at (anyone taking the patent out of play yields the space to everyone). I was not thinking of the first challenger.

    I do see an issue then, with a first challenger being able to be persuaded not to take the item to completion. In such cases, an expedient remedy may be to extend the first challenger option to someone willing to take the battle all the way to a court decision.

  • [Avatar for IANAE]
    June 15, 2010 03:01 pm

    “the same path not taken by the paid-off follower is still there, no? The same patent still has all the same weaknesses, no?”

    The patent still has the same weaknesses, but nobody else will be able to collect the reward for being the first person to successfully challenge it.

    The law rewards only the first challenger, and only if that first challenger is successful. That’s supposed to be what makes people want to challenge the patent. The problem with the settlement is that it uses up the “first challenger” spot, and the patentee is guaranteeing the first challenger will not be successful.

  • [Avatar for Blind Dogma]
    Blind Dogma
    June 15, 2010 01:45 pm

    and thereby make sure nobody else has the incentive to legitimately challenge the patent

    Not sure I follow this – the same path not taken by the paid-off follower is still there, no? The same patent still has all the same weaknesses, no?

  • [Avatar for IANAE]
    June 15, 2010 12:18 pm

    “I cannot see how a right can be given in one statute and the exercising of that right be a violation of Antitrust laws.”

    Gene, I don’t pretend to be an expert on antitrust laws, but this strikes me as an oversimplification at best.

    Isn’t antitrust meant to cover rights that are exercised in an anticompetitive but otherwise perfectly legal way? Sure, the law provides for the patentee’s exclusive right, the law provides for challenges to the patent including a first challenge that is special, and the law provides for settling disputes. It’s the terms of the settlement, coupled with the specialness of the first challenge, that arguably make the otherwise perfectly legal settlement anticompetitive.

    What happens on the facts is that someone brings a first challenge, triggers the incentive for bringing the first challenge, and then is paid to go away. Instead of being encouraged to bring at least one legitimate challenge to the patent, the challenger is encouraged to settle and thereby make sure nobody else has the incentive to legitimately challenge the patent, an incentive that the statute clearly intended.

    The important question to discuss is not whether parties are generally entitled to settle disputes, but whether paying the first challenger to go away frustrates the intent of the statute to test these patents.

  • [Avatar for Alan McDonald]
    Alan McDonald
    June 15, 2010 11:34 am


    You are correct.

    The PTO will handle a Request for Reexamination in a pharma case just like any other. But they seem to initiate reexam on their own in truly embarrassing situations and whether a compound is truly novel or unobvious is not that kind of case


  • [Avatar for Gene Quinn]
    Gene Quinn
    June 15, 2010 11:12 am

    First, let me stand up for Lemley. Having spent a number of years trying to be an academic and constantly being denied because of my views are too practical, too capitalistic and too pro-patent, I don’t have a lot of love for the academics who pontificate and have no real world understanding about the consequences of their pontification. Lemley, however, is different. While I don’t always agree with him his views are grounded in reality. What I mean by that is that his views fit within an envelope of what is acceptable argumentation in the real world. Anyone who thinks that Lemley is an ivory tower academic doesn’t know him, and to pull a sentence out of context and not give his views appropriate attention is a mistake. Lemley is a get it guy with a perspective that is different from many of us, but he does stay grounded in facts. Thus, I would caution dismissing his arguments.

    I also tend to agree with Alan that the USPTO doesn’t, and won’t initiate reexamination over pharma patents, at least not of their own accord. Like everything else, if a decent or interesting question of patentability is raised they will grant a reexam, but they only take the steps to initiate on their own in cases where there is real embarrassment. Is that what you meant Alan, or were you saying they won’t even grant reexam if requested? I think the PTO has granted several reexams in the pharma tech area.

    Finally, to address EG, I tend to agree with Lemley in principle, but not in application. Hatch-Waxman is a mess. A real disaster that shows the damage that can be done when Congress attempts to micromanage behavior. If they intended this then great, but who thinks this is what they intended? Not me. However, it is what they wrote into the law and specifically allowed. Therefore, I cannot see how a right can be given in one statute and the exercising of that right be a violation of Antitrust laws. I have long held this belief and in many contexts across the board, not just patents, although my views are mostly developed in the patent space. I have held that belief since I taught Antitrust law (yes I taught it once upon a time). I even wrote a law review article or two about Antitrust issues and patent misuse.


  • [Avatar for Blind Dogma]
    Blind Dogma
    June 15, 2010 10:26 am

    There’s no way the PTO is going to instigate a reexam over pharma patents

    Why not?

    The egregious stink over a bad pharma patent is far worse than the harmless silliness of a stupid (and highly likely not to be enforced) patent.

  • [Avatar for EG]
    June 15, 2010 08:39 am


    I agree with you. Another instance of the Hatch-Waxman “multi-headed hydra” coming into play. One of the most poorly drafted pieces of legislation ever.

  • [Avatar for Alan McDonald]
    Alan McDonald
    June 15, 2010 08:19 am

    The PTO doesn’t order reexam of patents of questionable validity. They only do it when the PTO looks stupid for issuing the patent in the first place (the “religious soap case”). There’s no way the PTO is going to instigate a reexam over pharma patents.

    While I don’t agree with Lemley on the argument, I do agree with the position that reverse payments to protect patents should be a per se antitrust violation.

  • [Avatar for Blind Dogma]
    Blind Dogma
    June 15, 2010 08:01 am

    Lemley’s anti-patent taint comes through with his “A patent does not confer a certain legal right. Way too much academia and not enough real world in such a statement.

    Sure, it stinks when a patent holder pays an excessive amount to keep someone from challenging the patent – but doesn’t the Director have a sua sponte right to call into re exam any patent out there? Shouldn’t that be enough to be rid of bad patents, rather than burning down the house for a piece of toast?

  • [Avatar for EG]
    June 15, 2010 07:47 am


    I once took the view of these professors about the problems with reverse payments under the Hatch-Waxman scheme (any blame for this scheme should be placed on Hatch-Waxman, not those who legtimately try to take advantage of it). But Kevin Noonan’s series (and an excellent one) on Patent Docs concerning these cases has convinced me otherwise, that this ruling by the Second Circuit and by the Federal Circuit in their own Cipfloxacin antitrust case do make sense in using a “rule of reason” approach that these payments aren’t per se illegal. Also, the Eleventh Circuit in Schering v. FTC ruled in favor of Schering and against the FTC “per se” rule.

  • [Avatar for M.Senthil KUmar]
    M.Senthil KUmar
    June 15, 2010 02:10 am

    The agreement reached between generic and brand companies within the exclusive zone of patent law may look as though it does not violate anti competitive laws. However, the very fact that reverse payment involving generic and brand companies to prevent the entry of generic entry is very well within the reach of anti competitive laws and hence such judgement needs to be judicially reviewed again as it prevents the entry of affordable generic medicines to the public. Regards, M.Senthil Kumar